Ruling Number: 50426076-125[30-2016/20-4097]-16109 Introduction In a private ruling dated April 26, 2017, the Kayseri Tax Office (Taxpayer Services Group Directorate) addressed the taxation of dividends to be paid to French resident shareholders of a Turkish resident company operating in a free zone. The taxpayer stated that their company operates in the Kayseri Free Zone and has decided to distribute prior years’ profits. The shareholders are: A French resident legal entity holding 90% of the shares, and A French resident real person (individual) holding 10% of the shares. The taxpayer requested clarification on: Whether the dividend distribution is subject to withholding tax, and How the matter should be evaluated under the Türkiye-France Double Taxation Treaty. Part I – Domestic Law Analysis Corporate Tax Law (Law No. 5520) Article 3(2) – Limited Liability: Corporations whose legal and business centers are both not located in Türkiye are taxed only on their income derived from Türkiye. Article 30 – Withholding Tax for Limited Liability Taxpayers (Paragraphs 1 and 3): Type of Dividend Recipient Withholding Tax Rate Limited liability corporations 15% Limited liability real persons (individuals) 15% (under Income Tax Law Article 94) Income Tax Law (Law No. 193) Article 75 – Movable Capital Income: Dividends from shares and participation interests constitute movable capital income. Article 94(6)(b)(ii) – Withholding Tax on Dividends: Full liability corporations distributing dividends to: Limited liability real persons, Limited liability corporations (except those receiving dividends through a PE in Türkiye), and Limited liability taxpayers exempt from income/corporate tax, are required to withhold tax at 15%. Free Zones Law (Law No. 3218) – Temporary Article 3: Profits derived by license holders from activities in free zones are exempt from income/corporate tax for the period specified in their license. However, this exemption does not affect the withholding tax obligation under Article 94(6)(b) of the Income Tax Law. Important: The free zone tax exemption applies to the company’s profits (at the corporate level) but does not exempt dividend distributions from withholding tax. Part II – Double Taxation Treaty Analysis Türkiye-France Double Taxation Treaty (Effective January 1, 1990) Article 3(1)(e) – Definition of “Company”: “Company” means any body corporate or any entity that is treated as a body corporate for tax purposes. Article 10 – Dividends (Paragraphs 1, 2, and 4): 1. Dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the State where the paying company is resident. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed: (a)15% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) holding directly at least 10% of the capital of the paying company; (b)20% of the gross amount of the dividends in all other cases. 4. The term “dividends” includes income from shares, founders’ shares, or other rights (not being debt-claims) participating in profits. Part III – Ruling Conclusion Step 1 – Characterize the French Resident Shareholders Shareholder Holding Characterization under DTT Applicable Treaty Rate French resident legal entity 90% Company (Article 3(1)(e)) Article 10(2)(a) – 15% French resident individual 10% Real person (individual) Article 10(2)(b) – 20% Step 2 – Apply Domestic and Treaty Rates Shareholder Domestic Withholding Tax Rate Treaty Rate Applicable Rate French resident company (90% share) 15% 15% 15% French resident individual (10% share) 15% 20% 15% (lower domestic rate applies) Key Principle: If domestic law provides a lower rate than the treaty rate, the lower domestic rate applies (more favorable to the taxpayer). Step 3 – Free Zone Tax Exemption – No Effect on Withholding Tax Factor Determination Company’s profits are exempt in free zone Yes (under Temporary Article 3) Does the exemption apply to dividend withholding? No – the exemption does not affect the withholding tax obligation under Article 94(6)(b) Withholding tax still required? Yes Summary Table Shareholder Holding Characterization Domestic Rate Treaty Rate Applicable Rate French resident company 90% Company (legal entity) 15% 15% 15% French resident individual 10% Real person 15% 20% 15% (lower domestic rate) Foreign Tax Credit Under Article 23(2)(a) of the Türkiye-France DTT, taxes paid in Türkiye on dividend income may be credited against French tax on the same income. Required Documentation for Treaty Benefits To benefit from the treaty provisions, the French resident shareholders must: Obtain a Certificate of Residency from the competent French authorities proving that they are fully liable to tax in France on their worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent (the taxpayer) or the relevant tax office. If the Certificate of Residency cannot be provided: Domestic law provisions (15% withholding tax) will apply. Important Notes The French resident legal entity (company) qualifies for the 15% treaty rate under Article 10(2)(a) because it holds at least 10% of the capital (90%). The French resident individual qualifies for the 20% treaty rate under Article 10(2)(b), but since the domestic rate is 15% (lower), the 15% domestic rate applies. Free zone tax exemption applies to the company’s profits but does not exempt dividend withholding tax. Both shareholders must provide Certificates of Residency to benefit from the treaty (though the rate is the same as domestic for the corporate shareholder, the certificate is still required for the foreign tax credit in France). This private ruling is based on Article 413 of the Tax Procedure Law No. 213. The ruling becomes invalid if incorrect information is provided, or if there is ongoing tax audit, litigation, or reconciliation related to this matter. Acting in accordance with this ruling protects the taxpayer from tax penalties and default interest for the related transactions. Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither MuhasebeNews nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.